Explanation:
Using the binomial tree model to calculate delta:
Given:
$19$20$23.75$15.2Calculate option payoffs:
$3.75$0Calculate delta:
Hedge calculation:
To make the position delta neutral, the trader needs to offset this negative delta by buying shares:
Therefore, the correct answer is B: Long about 877 shares.
An option trader is currently holding short positions in 2,000 European call options that will all mature in one month. The current stock price is $19, while the strike price of those call options is $20. The trader is considering the delta hedging strategy based on a simple one-step binomial tree model. In the model setting, one month later, the stock price will be either $23.75 or $15.2. What should the trader do in order to make the position delta neutral?
A
Short about 877 shares.
B
Long about 877 shares.
C
Short about 1,111 shares.
D
Long about 1,111 shares.
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